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With zero liquid assets, startups must often rely on third-party investors, especially early on. Yet, not all investment opportunities are the same, and a bit of due diligence can make or break the future of your startup.
Here are the steps you should take during the investment due diligence process.
Defining Due Diligence
Due diligence refers to the investigation of a potential business offer to confirm all facts. Buyers, sellers, investors, and companies seeking investment funds all perform due diligence to safeguard their assets.
The law makes it mandatory for broker-dealers and certain government organizations to conduct due diligence.
There are several types of due diligence, including:
- Real estate
For example, tax diligence may investigate the facts of a business merger. Commercial due diligence software development will help IT investors reduce their risk. It will also increase their negotiating power when investing in new product development.
Financial due diligence may protect investors from spending money on a volatile company.
The Due Diligence Process Explained
Due diligence starts with an agreement. Both parties share their terms with each other in a non-binding document known as the letter of intent. The letter includes price, process, and transaction structure.
The Letter of Intent
With the letter of intent submitted, the investor will bring a team of specialists to examine the deal. This team may include external consultants and financial advisors, as well as legal experts. The letter also sets a timeline with deadlines for submitting information, issuing reports, and revising the investment offer.
At the same time, the investee will also bring their own advisors to examine the deal. If you are an investee seeking funding, your due diligence should focus on the financial terms of the deal, especially profit share configurations.
Both the investor and the investee have to agree to share information about each other’s operations. This builds trust and gives due diligence advisors access to what they need to give their expert opinion.
Access to information can be a sensitive issue when dealing with confidential business data and private investments. This is why investors often undertake it through information exchange protocols. These protocols formalize the process and minimize information leaks.
Audits and Exchange of Information
During the actual due diligence process, both parties will exchange questions. The investor will send teams to the target business to inspect the business and interview managers.
Consultants will then examine any due diligence findings and compare them with the content of the letter of intent. If there are no deviations, the investor will then conduct a financial viability analysis.
With the analysis concluded, the investor will agree on negotiating the details of the transaction. The proceeds of due diligence will often affect the size and nature of the deal.
Expanding Your Business Network
Seasoned business people have gone through the due diligence process many times. This experience can be invaluable to a new business owner.
Looking for a network of startup and small business owners? Welcome to the Small Business Brief forum. Here you can discuss due diligence, marketing, personnel, attracting new customers, and any other topic that will enable you to grow your business.